Unilateral capital-gains cut pondered Plan would skirt Congress to cut capital-gains tax

September 03, 1992|By Boston Globe

WASHINGTON President Bush and his top aides are considering an executive order that would substantially reduce taxes on the gain on house sales and investment profits. The administration had previously rejected the idea as unconstitutional.

White House officials are awaiting an opinion from U.S. Attorney General William P. Barr about whether the unilateral move would be legal. Aides said that Mr. Barr may inform the administration of his views as early as next week.

Mr. Bush and senior campaign officials are said to be weighing whether the order to index capital gains, the profits from investment, against effects of inflation would provide a political lift for the president or backfire by making it appear that he is toying with the tax code to win re-election.

"I think it's a 50-50 shot he'll do it," said William K. MacReynolds, economic policy director with the U.S. Chamber of Commerce, an industry group pushing for the change.

Under a plan being touted by the chamber and some conservative congressional Republicans, Mr. Bush would effectively cut the capital-gains tax, a goal he has until now sought through legislation, by ordering the Treasury Department to redefine the word "cost" in the federal tax code so that it is measured in current, rather than historical, dollars.

The move would have the effect of "indexing" capital gains for inflation, permitting the government to tax only that part of the gain that comes from a real increase in value and not the part that results from a general price rise. It would also probably set off a firestorm of protest from groups that say it favors the rich and would produce a spate of legal challenges.

"It would certainly raise substantial constitutional questions," said Professor Laurence H. Tribe of the Harvard Law School. "At first glance, there are considerable questions about whether the president has the authority to do this."

Indeed, until now legal, rather than economic, reasons have persuaded the Bush and Reagan administrations to drop the idea despite the repeated importunings of conservatives.

The most recent rejection came only two weeks ago when Treasury Secretary Nicholas F. Brady said department lawyers had reviewed the issue and had concluded that the president could not act without congressional approval.

"If we could do it, we would," Mr. Brady said shortly before the Republican convention in Houston. "We have had no competent legal advice that you could do it."

According to White House staff members and aides to several congressional Republicans, the administration's thinking began to change at about the time of the convention when senior campaign officials, led by new White House Chief of Staff James A. Baker III, concluded that Mr. Bush cannot hope to win re-election without tackling the issue of the economy's lackluster performance and answering criticisms that he has been weak on domestic issues.

White House officials who favor the executive order were helped last week when a team of lawyers hired by the Chamber of Commerce and headed by Charles J. Cooper, a former assistant attorney general during the Reagan administration, concluded that the president does have the authority to order the change. White House officials said Mr. Bush would wait for Mr. Barr's opinion before deciding to act.

Although Mr. Bush has repeatedly used his support for a capital-gains tax cut to highlight his political differences with Democrats, many congressional Democrats support a rate cut and some form of inflation indexing. This year, Democratic presidential candidate Bill Clinton appeared to endorse the idea of indexing, although he has since dropped it from his economic plan.

However, virtually all Democratic versions of indexing, and many Republican ones as well, are much more limited than the one that Mr. Bush is considering, focusing only on assets bought in the future or covering only certain kinds of assets, such as houses and stocks, but not more unusual investments.

Economists generally favor indexing on grounds that it corrects for inflation and treats investment profits like most other income. Wage and salary income is currently indexed. However, even proponents acknowledge that indexing would cost the government huge sums in forgone revenues.

"The idea of indexing is that you don't want to tax phantom gains" created by inflation, said Harvard economist Dale W. Jorgenson. But "these provisions are very, very expensive," he added.

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